The Growing Importance of Asset Quality

From speaking with treasury teams around the world it is evident that one finance trend born of the recession is set to grow and mature in the years ahead: the worry about asset quality. This trend goes way beyond the obvious trials and travails of the financial services sector; finance teams in industries as diverse as industrial manufacturing and high-technology are being asked about asset quality by their senior management.

The reason for this is that the recession has made the corporate world scared of surprises. Senior managers worry that one day they’ll suddenly find out that what their firm owns is not worth what they thought it was. Finance teams in a variety of countries and a variety of sectors are being asked to provide breakdowns of the quality of all their firm’s assets – sometimes to the line item level – and this is no easy task.

I’ve been in three conversations lately which all provide good evidence of this trend and all help explain the problem at hand. We’d be interested in hearing your thoughts on each of the three and so have inserted a polling question to gather your feedback; thank you in advance for providing it.

Three Pieces of Evidence of an Increasing Interest in Asset Quality

1. Bankers’ concerns due to Basel III stipulations: Basel III is the latest round of
reforms to the banking industry’s global regulations, and is
due to be implemented by the end of 2012. Like the Basel I and Basel II reforms, Basel III stipulates (among other things) the minimum amount of capital that banks are allowed to hold as security against their debtors defaulting, and bank treasurers are struggling with one piece of preparation in particular. Basel III will require them to calculate their bank’s liquidity ratio based on the number of “long-term” corporate accounts that the bank holds, and treasurers are finding it extremely difficult to distinguish all of their long-term, loyal customers from their less loyal customers.

2. Growing interest in “Know Your Customer” questions: “
Know Your Customer” (KYC) is a process used mainly by banks to assess the viability of their clients prior to doing business with them. In the U.S. it has become mandatory to run checks like this in an effort to combat money laundering and terrorist financing (
learn more here). There has been growing interest in the KYC process from treasurers outside of the financial services industry; I am increasingly being asked about its potential as a way of gathering useful information on customers before long-term contracts are signed.

3. Foreign exchange and commodity hedging: One electronics manufacturer I’ve been speaking with recently is working on a detailed process to help the firm’s foreign exchange hedging and commodity hedging efforts. The new process allows the treasury team to incorporate FX and commodity price changes into their treasury workstation and allows them to show the effect of FX and commodity price changes on specific line items.

Senior managers at the firm like this specificity and the picture it gives them about the quality of their assets – now and in the future.

Discussion Question

Which of these topics would you be most interested in hearing more about?